No. Ken Lewis did not wake up on Monday morning and realise that paying sky-high prices for Countrywide and Merrill Lynch was a huge mistake. He didn’t suddenly realise he had no idea about the business models of those two financial companies, no real clear about what they earn money on and what the risks and challenges they face.
Instead, he just thinks he made a public relations boo-boo, a “tactical mistake.”
However, he expressed regret that an “abundance of caution” had led him to take more aid than he said was necessary to absorb Merrill’s $15bn fourth-quarter loss.
BoA received an initial $25bn from the Treasury in September. It requested a further $20bn at the end of December as the scale of Merrill’s losses eclipsed BofA’s initial forecasts.
“In hindsight, it was a tactical mistake because it put us in the same category as Citigroup,” said Mr Lewis. “We could still have had 8 per cent tier 1 capital after a $15bn loss but we wanted a cushion.”
Mr Lewis said that it would have been better to request only $10bn for that purpose. He said that could have helped to curtail investor fears that further problems were in the offing.
The scale of government assistance for Bank of America and Citigroup has helped fuel speculation that outright nationalisation could be necessary for one or both banks. The fears have contributed to a 76 per cent drop in Bank of America’s share price since its acquisition of Merrill Lynch closed on January 1.
Bank of America is down nearly 9% today, leading the pack of troubled banks lower and lower. No doubt this is incredibly frustrating to Ken, who is convinced he can stay on as the chief executive at the bank until it pays off the $45 billion it has taken from the government. To be perfectly fair, we’ll note that Bank of America passed Christopher Whalen’s stress test with flying colours and Oppenheimer’s Meredith Whitney rated Bank of America outperform.
Still, investors are sceptical. What’s going on? We can’t tell you what generic investors, much less “the market,” thinks about anything. So let us tell you what we think. We’re not convinced that decisions at Bank of America are being made with any sort of decent risk management in mind. Lewis seems to be more of a glad-handing guy focused on mostly irrelevant stuff like “synergies” and “strategic opportunities” and market timing, rather than any kind of systemic risk management. That means his company is likely to make a lot of expensive mistakes, as it is pretty much flying blind when it comes to risk.
Even when Lewis tries to be reassuring, he scares us. He says Bank of America could possibly pay back the $45 billion of TARP money in “two or three years.” How does he know that? How could he possibly anticipate both the market and regulatory environment that would allow Bank of America to confidentally predict it will have $45 billion in excess capital in two years? This doesn’t sound like a rigorous statement about BofA’s business model, risk management or markets. It sounds more like guess work. And, frankly, we’ve had just about all the banking-by-guessing we can take.